New Asian infrastructure bank can benefit world economy

(MENAFN- Arab News) BEIJNG: Competition between the world''s two greatest economic powers is both inevitable and (for the most part) beneficial. This is the case even when China and the United States are arguing over control of increasingly obsolescent international financial institutions.

China''s effort to start the new Asian Infrastructure Investment Bank grows more popular by the day despite US resistance to the idea. The question is no longer whether the bank will fulfill an unmet need but how best to ensure that it contributes to Asian growth and not incidentally draws China more deeply into the global financial order.

Now that Britain and several other European countries have joined the bank holdouts such as Australia and South Korea are almost certain to jump in. This counts as a soft-power victory for China over the US which reportedly lobbied allies not to sign up. But Washington largely has itself to blame. For years the US has called on China to bind itself to international norms and financial institutions without making room for it to do so. Congress persists in blocking efforts to dilute US dominance of the World Bank or to increase China''s voting share at the International Monetary Fund which stands at less than 4 percent compared with almost 17 percent for the US.

That''s not to say Britain and others have joined the new bank out of altruism; London is clearly eager to establish itself as the main offshore trading hub for the renminbi. And the economic rationale for the bank in an era when the World Bank itself is facing something of an existential crisis and the global market for private capital is robust may be diminishing. Nevertheless the region has huge infrastructure needs up to $800 billion worth every year according to a much-cited study from the Asian Development Bank. American opposition to any new source of financing looks churlish and hypocritical.

Concerns that a Chinese-dominated institution might encourage lowered lending standards are overstated. If China wanted to hand out dodgy loans to buy loyalty it could easily continue to do so on a bilateral basis. But that practice has largely backfired; Beijing faces souring debts from Myanmar to Sri Lanka to Ukraine. The whole point of working through a multilateral organization is for China to gain global legitimacy for its largess.

At this point with much left to be decided about the new bank''s governance and lending practices it should be advantageous to have US allies at the table. To begin they should work to ensure that decisions are made by consensus and collaboration. Given that China is expected to contribute almost 50 percent of the new bank''s funds it will no doubt expect to carry a prevailing influence. But European members will very quickly face pressure at home to pull out if the bank backs controversial projects against their wishes.

Then there''s the question of which best practices the new bank should adopt. While several of these are being rethought even within existing international development banks at least two should be non-negotiable: The new bank should adopt the debt sustainability framework promoted by the IMF and World Bank to prevent developing nations from taking on unsustainable debt loads. And it should commit to competitive tendering and universal access in procurement to avoid the perception that its loans are meant to funnel business to Chinese companies.

None of this requires that the US or Japan join the new bank. (Domestic politics in both countries would make that impossible in any case.) But if those countries are concerned about China''s increasing influence they could do much more to strengthen the institutions they already dominate. American officials should be pushing harder for example to carry out financial reforms that would bolster the Asian Development Bank''s ability to lend. If the US really doesn''t want other nations following China''s lead it will have to offer a stronger alternative.